Coal production in the Powder River Basin (PRB) could decline significantly in 2020, but by how much remains to be seen, according to a report by Moody’s Investors Services.
Moody’s October 16 report, “Powder River Basin remains distressed; ESG [environmental, social and governance] factors weigh down long-term prospects,” cited the joint venture between major coal producers Arch Coal and Peabody Energy, as well as multiple bankruptcies in the region, as factors that could contribute to deep drops in coal production in 2020.
“It’s very much an evolving story,” said Ben Nelson, one of the authors of the report and vice president and senior credit officer for Moody’s.
The report alludes to projections from the U.S. Energy Information Administration (EIA), in which the federal agency forecasts production the western U.S. region, which includes the PRB, will decline from 418 million short tons in 2018 to 364 million tons in 2019 and 339 million tons in 2020. And even though mining operations had 476 million tons of coal capacity in the PRB, according to EIA estimates, the region only produced 324 million tons in 2018.
Nelson said the production uncertainty is the result of several factors. Should the joint venture be finalized between Arch Coal and Peabody, both coal companies could decide to close or significantly curtail other PRB mines because of lackluster demand, he said.
The joint venture calls for both major coal producers to combine their assets in the PRB and Colorado, including Arch’s Black Thunder mine and Peabody’s North Antelope Rochelle mine, both located in Wyoming. The Black Thunder mine and the adjacent North Antelope Rochelle mine were the top two producing mines in the U.S. in 2018, with output at 71.1 million short tons and 98.3 million short tons, respectively, according to EIA data.
Another factor that could contribute to closed mines in the PRB in 2020 is how some of the coal company bankruptcies are handled, Nelson said. Contura Energy announced on October 21 that Eagle Specialty Minerals, an affiliate of FM Coal, has completed the process for acquiring two assets previously owned by bankrupt coal producer Blackjewel – the Eagle Butte and Belle Ayr thermal coal mines in Wyoming. Contura was a former owner of the Eagle Butte and Belle Ayr mines before Blackjewel took over production. Contura had also reacquired Blackjewel’s Appalachian coal assets.
The new owner might run the mine for a short duration or the new owner might shut down the mine completely, Nelson said.
“The new owner will run into the same problems as Blackjewel…How can the new owner sustainably operate the mine under current market conditions,” Nelson said.
One other factor that could affect PRB production in 2020 is whether the Navajo Transitional Energy Corporation (NTEC) buys mines previously owned by the defunct Cloud Peak Energy, which declared bankruptcy earlier this year. NTEC is in the final stages to buy Cloud Peak’s assets to support NTEC’s coal-fired plant. This could also influence how much coal production comes out of the PRB in 2020, Nelson said.
What does this mean for the trains hauling coal?
Union Pacific (NYSE: UNP) and BNSF (NYSE: BRK) haul PRB coal, and the report confirms the rail industry’s conclusions that U.S. coal production has been facing a systemic decline because of environmental regulations that encourage power generation using renewable energy sources such as solar and wind power. Low natural gas prices have also served as a competing fuel to coal.
Union Pacific expects “coal to experience continued challenges with volume throughout the balance of the year [2019] and weather conditions will always be a key factor for coal demand,” said Kenny Rocker, UNP’s executive vice president for marketing and sales, during his company’s third-quarter earnings call on October 17.
Although some PRB coal gets exported, the coal has certain unique qualities, Nelson said. But the big hindrance to exporting PRB coal is the local opposition in the Pacific Northwest to open the region to coal exports, he said. Exporting coal through British Columbia, Canada, would be cost-prohibitive unless coal prices go up. Meanwhile, other potential ports for export, such as those on the Gulf and East Coasts, are also cost-prohibitive, Nelson said.
“I really don’t think the railroads would change their fee structure for new exports of PRB coal. That’s my gut feeling,” Nelson said.
A September report from Moody’s suggests that railroad companies could lose billions as a result of dwindling coal production in the U.S.
“Higher cost structures – including incorporating transportation costs to overseas markets – hinder U.S. exporters of thermal and metallurgical coal to compete effectively in seaborne markets, in particular when prices are low,” Moody’s said. “Railroads have shown a willingness to lower rail transportation costs for export coal when prices are low to help U.S. producers compete with overseas suppliers,” Moody’s September report said.
